Articles Posted inNon-Compete Agreements

Last October, I discussed a case in which the District of New Jersey issued an injunction which enforced ADP, LLC’s non-compete agreement with two of its former employees. Earlier this month, the Third Circuit Court of Appeals affirmed that ruling.

Non-Compete Agreement in Online FormTerms Agreement ConceptADP claims that Jordan Lynch and John Halpin violated the non-compete agreements they entered into when they accepted stock awards from the company. Specifically, ADP provided the stock awards, its stock award plan and a non-compete agreement to Mr. Lynch and Mr. Halpin online. Before they could accept their stock awards, they had to check a box simply confirming they had read all three documents, although it did not explicitly state that they were agreeing to the terms of those documents.

The non-compete agreement indicates that an employee cannot work for a competitor of ADP, or solicit business from any of its current and prospective clients, for 12 months after he stops working for the company. Nonetheless, when Mr. Lynch and Mr. Halpin left ADP they began working for one of its competitors, Ultimate Software.

In a recent ruling in a non-compete agreement case, United Stated District Judge William J. Martini declined to lift an injunction prohibiting two former employees of ADP from soliciting the company’s clients on behalf of a competitor. Notably, however, the judge did not prohibit the employees from working for the competitor.

The two employees, John Halpin and Jordan Lynch, each participated in ADP’s stock award plan for five consecutive years. To participate, they both had to click on an electronic box to acknowledge that they had read related documents. Those documents included restrictive covenants which state that the employees cannot: (1) solicit certain clients and prospective clients of ADP for one year after they stopped working for the company; (2) disclose any of ADP’s confidential information; or (3) use ADP’s confidential information regarding the identity of the company’s current, past or prospective clients. In addition, Mr. Lynch signed a separate “Sales Representative Agreement” that included similar restrictions.

After Mr. Halpin and Mr. Lynch left ADP, they each began to work for one of its competitors, The Ultimate Software Group, Inc. (“USG”). ADP sued Mr. Halpin and Mr. Lynch, asserting that they had violated their restrictive covenants. It also sought a preliminary injunction to prohibit them from working for USG and from soliciting ADP’s clients. The two former employees made numerous arguments in opposition to the injunction, including that they never actually read or agreed to the restrictive covenants.

Many executives and other high-level employees receive stock options, restricted stock units (RSUs) and other forms of deferred compensation as part of their compensation packages. Often, the employers who issue these forms of equity to their employees include non-compete agreements and other restrictive covenants in the stock agreements. These provisions frequently include “clawback” provisions that require the employee to return the value of the equity they received if they violate the terms of one of the restrictive covenants.

However, these provisions may not be enforceable under either New Jersey or New York law. In both states, the law is clear that penalty provisions in contracts are not enforceable. But a contract can contain a liquidated damages provision, meaning an agreement in advance about the amount of damages when the parties expect it will be difficult to prove the actual damages caused by a breach.

As the New Jersey Supreme Court explained in a 1994 case, Wasserman’s Inc. v. Township of Middletown, a liquidated damages provision must be a “reasonable forecast of the provable injury resulting from breach” of contract at the time the contract was written. In other words, the agreed-upon amount of damages has to be a fair estimate of what the actual damages are likely to be. If it is not, then “the clause will be unenforceable as a penalty and the non-breaching party will be limited to conventional damage measures,” meaning it will have to prove its actual damages. While Wasserman’s itself does not involve a clawback provision, in an 2011 unpublished opinion, Schiavi v. AT&T Corp., the New Jersey Appellate Division recognized that the same principles apply to stock clawback clauses.

The New Jersey Employment Agencies Act requires employment agencies doing business in New Jersey to register and obtain licenses from the New Jersey Division of Consumer Affairs. Agencies that fail to do so cannot file lawsuits seeking to collect fees or commissions that are owed to them, or to enforce employment agreements with the individuals who work for them. For instance, an unlicensed employment agency cannot sue to enforce a non-compete agreement.

However, a recent case makes it clear that although both employment agencies and temporary help service firms must register with the state, only employment agencies have to obtain licenses.

The case involves Varuna Jothi Uppala, an Information Technology worker who was employed by Logic Planet. Logic Planet agreed to train Ms. Uppala and assign her to work for its clients on temporary assignments. Ms. Uppala was an employee of Logic Planet, which agreed to pay her a salary of $60,000 per year and to provide her health insurance and other benefits.

A recent decision from the District of New Jersey recognizes that employers are not entitled to compensatory damages from employee who breach their non-competition agreements unless the employer can prove it would have received the income but-for the violation.

Mr. Munoz and Mr. Abreu each signed one year non-compete agreements with JSC when it hired them. Those agreements prohibited them from owning, operating, or joining a business that directly or indirectly competes with JSC within sixty mile of any JCS office.

Last week, the United States Supreme Court overturned a state court’s ruling that a non-compete agreement is invalid because it violates state law. The Supreme Court ruled that since the non-competition agreement included a valid arbitration clause, an arbitrator has to decide whether the non-compete agreement is legally enforceable.

The case originated in Oklahoma, a state which has a statute that limits when non-competition agreements are enforceable. Eddie Lee Howard and Shane D. Schneider filed a lawsuit against their former employer, Nitro-Lift Technologies, in which they sought a ruling that the confidentiality and non-compete agreements they entered into with Nitro-Lift were unenforceable because they violated Oklahoma law. The case went up to the Oklahoma Supreme Court, which ruled that the non-compete agreements were null and void under Oklahoma law. However, Nitro-Lift argued that the state Supreme Court should not have decided whether the non-compete agreement was enforceable since there were provisions in the non-compete agreements which required all disputes to be decided through private arbitration.

The United States Supreme Court agreed with Nitro-Lift. In Nitro-Lift Technologies, LLC v. Howard, it ruled that once a court determines there is a valid and enforceable arbitration agreement, decisions about the enforceability of anything else in the contract must be decided by an arbitrator. As a result, the Oklahoma Supreme Court should not have decided whether the non-compete agreement itself is enforceable.

Nitro-Lift is part of a series of cases in which the United States Supreme Court has recognized how difficult it is to get around arbitration agreements. This is extremely important, since when you sign an arbitration agreement you are giving up your right to a jury trial, and arbitration is typically considered much more favorable to employers than employees.

In a sluggish economy employers tend to use non-compete agreements more frequently to protect their interests. At the same time employees struggling to find a job in difficult job market are more likely to question and challenge the limitations set by their non-compete agreements. As a result, we frequently receive inquiries from employees about whether their non-compete agreements are enforceable under New Jersey law. For example, an employee recently asked if her employer could sue her for violating a non-compete agreement even though the employer fired her only a few weeks after she started the job.

Technically, an employer is not required to give an employee anything more than his or her job, even for a short time, in exchange for signing a non-compete agreement. However, non-compete agreements are disfavored by New Jersey courts and have to meet a few different requirements to be enforceable. Thus, it is impossible to give a short or definitive answer to this client, especially without carefully reviewing her agreement. I can explain, however, the factors New Jersey courts consider when deciding whether to uphold a non-compete clause in an employment agreement.

A non-compete agreement will be enforced in New Jersey only if it protects the legitimate interests of the employer, does not impose an undue hardship on the employee, and is not unduly harmful to the general public.

Legitimate interests of the employer can include protecting trade secrets, proprietary or confidential information, and customer relations. Courts generally will not uphold a non-compete agreement or another form of restrictive covenant if the employer is merely trying to prevent fair competition.

In determining if a non-compete agreement places an “undue burden” on the employee, courts analyze whether the employee is likely to get reemployed in his field somewhere else despite the restrictions of the agreement. The reason why the employee was separated from the job can also be an important factor. For example, courts are much more likely to find an undue hardship on the employee if the employee was laid off or fired without cause, like the client I mentioned above. However, unlike how New York treats non-compete agreements, New Jersey does not have a rule that they are automatically invalid if an employee lost his job involuntarily.

New Jersey courts also have struck down non-compete agreements that limit the public’s right to have access to receive professional advice and services. For example, New Jersey does not permit non-compete agreements to be enforced against attorneys. Although there is no similar prohibition for physicians, accountants, or other licensed professionals, courts will consider whether a non-compete agreement harms the public by restricting its access to professionals in a particular geographic area.

A non-compete agreement only is enforceable if it is reasonable in terms of its duration and geographic scope. What is reasonable depends on all facts in the case, and there are hardly any bright line rules. Non-compete restrictions lasting up to two year are typically enforceable, but longer restrictions can be enforceable depending on the circumstances. The geographic scope can legitimately be limited to any area where the company actually does business, or is seeking or planning to do business. If a court finds the restrictions are overly board, it can rewrite the agreement to make the restrictions reasonable. However, if a court finds the company intentionally made the restrictions unreasonably broad, it can throw out the entire agreement.

Under New York law, non-compete agreements and other restrictive covenants in employment contracts are disfavored, and are enforceable only in limited circumstances. New York courts enforce non-competes only if all three of the following conditions are met:

1. The non-compete is reasonably limited in scope and duration;

2. The restrictions are no greater than necessary to protect the employer’s legitimate interests;

3. The non-compete is not harmful to the general public;

4. The non-compete is not unreasonably burdensome to the employee.

Even when those four requirements are met, an employer seeking to enforce a non-compete agreement has to prove it is not merely seeking to use the non-compete agreement to prevent competition. Instead, it has to show the non-compete is necessary to protect its legitimate interests, such as to prevent the employee from using or disclosing its trade secrets or confidential information, to protect the company’s goodwill, or to prevent special harm due to the unique nature of the employee’s job.

There are few bright line rules regarding when a non-compete agreement is reasonable. In deciding whether a restrictive covenant is reasonable, courts consider a number of factors and balance the right of the employee to work and earn a living against the importance of the restrictions to protect the employer’s business. In terms of duration, covenants not to compete for 6 months or less are generally reasonable. New York courts have approved non-competes lasting up to two years when the restrictions are otherwise reasonable and not too burdensome for the employee.

If an employee is receiving compensation from her former employer during the period when she is supposed to refrain from competition, such as severance pay or garden leave pay, the non-compete is more likely to be upheld.

Even when a non-compete agreement is reasonable, it is still unenforceable if the employer fired the employee without good cause. Likewise, a reasonable covenant not to compete is unenforceable if the employer breached the employee’s employment contract.

Attorneys, as well as stock brokers and other registered representatives under Financial Industry Regulatory Authority (FINRA), should be aware that special rules apply to their non-compete agreements in New York. For example, agreements that restrict attorneys from practicing law are unenforceable, except as a condition for receiving retirement benefits. Likewise, contracts that prohibit customers from continuing to use the services of their registered representative are not enforceable.

A description of the section methodology for SuperLawyers and Martindale-Hubbell can be found by clicking on the links. No aspect of this advertisement has been approved by the Supreme Court of New Jersey.

ATTORNEY ADVERTISING

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.